Gold? Or Golden Fields?

Gold prices are on the wobble once again.

Last week, they finished up.  The reason for this was a weak dollar.  But as they began the week, prices on the world’s favorite precious metal slumped just slightly.   The denting came from inclines in prices for oil and wheat.

This week begins with more slumping in stocks as the market reacts to news that swine flu has hit American shores and that federal government health officials are declaring a health emergency in some areas and closing several schools. (The outbreaks have been in California, Texas, and New York City.  All victims had recently traveled to Mexico, with the exception of one woman whose husband had just come back from that country.)  President Barack Obama says the flu outbreaks are cause for concern but “not a cause of alarm” at this point.

Apparently, the markets were “concerned” enough to cause an adjustment, but nothing major at this point.

But what about gold?  Is this the time to buy?  Would investment gold be an appropriate Mother’s Day gift?

Gold is always a good gift for two reasons: its intrinsic value and its ability to suggest long-term, deep emotional attachment to the recipient.  The price of gold usually shifts little over the life of a recipient with the only change likely to be slow and steady incline.  We have certainly seen a bit of movement in recent months, with the economic downturn as investors sought refuge.  That rush seems to be over for now, but it was completely in keeping with what the market and even the general public believes to be true about gold: it keeps its value and over time, will even show growth when other commodities won’t.

I did mention inclines in oil and wheat, didn’t I?  The price of oil will continue to fluctuate up and down while Americans look for alternatives in fuel and means of transportation.   The price of wheat, meantime, is riding just a little below $4 per bushel.  I want to offer a touch of perspective on that one, my friends.

I grew up on a farm.  My father is a college professor who owned a portion of a family farm that he bought from his own father.  He then rented out plots of land to his kids and paid himself to farm it for us.  (Don’t worry; he offered great hourly rates on tilling fields.  We were all on the “family plan.”)  And at the end of every growing season, he sold the crop for us and put the money in our college funds.  He usually planted wheat, but occasionally corn.   And during my high school years, the price of a bushel of wheat ran right around $4 per bushel.   Which also means I have no explanation for the price of a loaf of bread or a filet mignon.

Wheat hasn’t gone up in decades.  Gold has risen steadily in those same years.   Gold is an excellent investment right now, and at the same time, it’s also a good moment to divest of that investment if you need the cash.  The choice is up to you, but think of it this way: on Mother’s Day, which one would your mother rather have: a bushel of wheat or a little bit of gold?

Gold Up; How About a Gold Standard?

The price of gold vaults upward, surpassing predictions and hits $1000 per ounce this week.  Not surprising, given consumers and investors concerns about the stability of the American dollar.  The value of gold always flies in the opposite direction of the dollar’s value.  That is, if investors think the dollar is going up, the value of gold drops in proportion.  If investors are worried about the dollar holding value, the price of gold goes up.

And every so often, we hear some naysayer suggest that what is truly needed is a return to the “gold standard” of yesteryear.  What is a gold standard?

A gold standard is a monetary system in which the regions common media of exchange (we’ll use the dollar as our example today) is a paper note that is freely, normally convertible to pre-set, fixed quantities of gold.  The gold standard is not in use by any government currently, having been replaced by currency.  (Although there are occasional, rare private currencies backed by gold.)

Every once in awhile, when financial concerns are weighing heavily, someone suggests that “all would be right if we would just return to the gold standard.”   We suggest that is probably not a likely scenario.

Why?  Let me offer you a few of the disadvantages of a gold standard system.

* The total amount of gold ever mined is believed to be in the amount of 142,000 tonnes.  Assuming a gold price of $1000 per ounce (which is sorta handy, at the moment!) that would bring a value of about $4.5 Trillion.  There is more American currency circulating than that, currently, so using a gold standard might be a little embarrassing.

* Most mainstream economists believe that adding currency to troubled economies helps.  If we relied on the gold standard, that would be impossible.

* Monetary policy and politics would be determined by gold production.  Do you really want mining companies running world politics?

The advantage: we might all feel more confident in the government, which is good at times of economic uncertainly like what we are facing, but in fact our government needs more freedom to operate in the face of such difficulties than a gold standard would induce.

Gold standard: the name sounds good, but the prospects aren’t likely or likeable in the long-term.

Panning for Clues in the Gold Market

This weekend, I was in Phoenix, Arizona and then headed upstate to Kingman. A friend mentioned that there was a gold mine along the way that operated “when gold prices are good.”

I’m guessing it’s not in operation currently. There are many ways to get the gold out of the ground, including panning, sluicing, metal detecting and dredging.

Gold panning is mostly manual technique of filling a wide, shallow pan, then adding water. Gold is denser than rock, so it quickly settles to the bottom of the pan.

Gold panning is the easiest technique for searching for gold, but not the only ones for small mining operations. There is also sluicing. A sluice box is essentially a man-made channel with riffles set in the bottom. The riffles are designed to create dead zones in the current to allow gold to drop out of suspension. The box is placed in the stream to catch water-flow and gold bearing material is placed at the top of the box. The material is carried by water through the box where gold and other heavy material settles out behind the riffles. Sluicing can also be done on a large scale.

Larger commercial mining operations employ screening plants to remove the large extraneous debris such as boulders and gravel before moving the material to a sluice box or jig plant.

And of course, we’ve all seen what I like to call an “accidental prospector.” He (or she) is the one walking up and down the beach, carrying a piece of electronic equipment known as a “metal detector.” This piece of machinery gives a positive reading on whether a quantity of gold may be present up to a meter below the area being scanned. This is very popular among gold diggers.

Larger commercial mining operations employ screening plants to remove the large extraneous debris such as boulders and gravel before moving the material to a sluice box or jig plant.

Right now, some mines are shutting down because of the slowdown of the rest of the economy. As the dollar drifts down and weakens, gold prices are expected to shift upward as investors seek protection from the weakened economy. Either up or down, too much fluctuation is likely to keep many mines shut down. Small operations may be forced to sell at deflated prices, while larger operations are already shutting and canceling new projects. These changes may be ongoing for sometime to come. We’ll talk more about that in future blogs.